VELESTO: Buy the dip

Sell-off overdone? VELESTO’s share price has recently dived 25% from a high of RM0.29 to RM0.215 yesterday. The rout has been largely fueled by market anxiety that Petronas may scale back its capex in light of Petros taking over the role of sole gas aggregator in Sarawak. Such a development raises concerns about the potential impact on VELESTO’s FY25 outlook, given that three of its six drilling rigs are contracted to Petronas for that year. With around 30% of Petronas’ FY23 revenue originating from the gas segment, the loss of its aggregator status in Sarawak could lead to diminished earnings for the company, possibilly prompting a deferral in its upstream capex.

Despite the abovementioned risk, we believe the selloff in VELESTO may be overdone, presenting a potential accumulation opportunity for investors. Even in the scenario where Petronas scales back its capex, leaving VELESTO’s drilling rigs idle, the latter is still likely to receive a standby rate equivalent to 60-70% of the DCR. Moreover, should an exploration capex rollback occur in FY25, it is unlikely that all three rigs chartered by Petronas will be equally affected, as some could be redirected toward brownfield projects.

Building a base. VELESTO is building a base at strong support region of RM0.205-0.215, with indicators showing uptick bias. A successful breakout above RM0.220 will signal a trend reversal and could propel the share price toward RM0.240-0.250-0.275 levels. Cut loss at RM0.190.

Collection range: RM0.205-0.210-0.215

Upside targets: RM0.240-0.250-0.275

Cut loss: RM0.190

Source: Hong Leong Investment Bank Research - 15 Aug 2024